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The Guardian: The great fuel folly

Oil firms’ output is down, yet profits skyrocket. It all points to the crisis predicted by the peakists

Jeremy Leggett
Tuesday February 5, 2008

Records tumble as the oil majors release their annual results. The most profit made by a European company: Shell’s $27bn. The most profit made by any company ever: ExxonMobil’s $40bn. Amid the noise about capital allocation and windfall taxes, there is a danger of missing the most important results of all. The oil and gas production of Shell, BP, ExxonMobil and Chevron is going down, not up. When BP announces its results today, industry insiders expect them to be down too.

This is not what is supposed to be happening. Our oil-addicted economies are supposed to be growing. The international oil giants are supposed to be expanding their production, not shrinking it. They are not supposed to be leaving the technically less well-equipped national oil companies such as Saudi Aramco and Pemex to carry the burden of expanding production to match global demand.

For people like me who worry about peak oil, the writing on the wall is ever clearer. We live in a world geared to the assumption that demand for oil can be met by supply. But it can’t for much longer. The fallout will dominate our lives within a few years.

Economists tend not to see the problem. As the oil price goes up, they assume more cash will be available for exploration, the oil majors will duly explore, and they will find more oil. But if so, why have the big five oil companies cut exploration spending in real terms? ExxonMobil, BP, Chevron, Royal Dutch Shell and ConocoPhillips used more than half their increased operating cashflow between 1998 and 2006 not on exploration but on share buybacks and dividends. Do they know something the economists don’t? Moreover, the International Energy Agency has described recent apparent increases in exploration spend as “illusory” because of inflation in costs in the far-flung places where the industry is now forced to look for new oil.

Growing numbers of industry insiders are sounding alarms. Global oil production today stands at around 85m barrels a day. The CEO of Total has said that we won’t get close to 100m barrels a day, much less the 115m programmed into assumptions about a growing global economy. The former head of exploration and production at Saudi Aramco, which until recently controlled the largest reserves in the world, thinks we are already on a plateau at 85m barrels a day, and can lift production no further.

Students of the world’s elderly giant oilfields, where so much of the production is concentrated, worry about unexpectedly fast decline rates. Mexico’s Cantarell field is amazing geologists with the speed of its production collapse. In the North Sea, some big old fields are shrivelling at a rate that is astounding the industry, notwithstanding high investment. Suppose fields in Saudi Arabia and Russia start to collapse too? About 90% of Saudi production comes from just five tired fields discovered four to five decades ago. What chance then of the national companies expanding production to compensate for the declines of the internationals?

If the “peakists” are correct, and the oil establishment suddenly awakens to its dysfunctional culture of overoptimism, here is what is likely to happen. The oil and gas producers are going to start keeping what remains for themselves, in an effort to feed their own economies. Many countries would then face the threat of not having enough oil and gas to run the production processes needed to manufacture the low-carbon technologies that could replace oil and gas. Or, indeed, to feed themselves.

Jeremy Leggett, the chairman of Solarcentury, is author of Half Gone: Oil, Gas, Hot Air and the Coming Global Energy Crisis
[email protected]

http://www.guardian.co.uk/commentisfree/story/0,,2252581,00.html

 

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One Comment

  1. Paddy Briggs says:

    Jeremy Leggett makes some excellent points in this article and he is quite right to draw attention to the continual failure of Shell and other oil multinationals to invest in exploration and production. Shell’s continued affection for buybacks and BP’s recent massive hike in dividend payments show that it is the stockholder stakeholder who is the most favoured recipient of largesse. Cash “given back” to shareholders is, of course, cash denied to capital investment or to other potential beneficiaries such as employees, pensioners or the community at large.

    This is not a temporary phenomenon – there has been a strategic shift in the industry that is irreversible. The power which was once in the hands of Exxon, Shell, BP and the others has shifted almost entirely to the National Oil Companies (NOCs). Remember that the growth of the oil industry was characterised by a corporation like Shell having skills and resources that the countries with the hydrocarbon resources lacked. So Aramco, Nigerian National Petroleum Corporation (NNPC), Petroleum Development Oman and the rest were established on the basis that the western oil company brought the technical expertise and the funding and the NOC partner was essentially a sleeping partner who simply banked their share of the income streams. Those days are long gone and whilst there will still be some areas where the multinational is the prime mover the shift to the NOC is almost complete everywhere. In Nigeria Shell is expected to lend NNPC the funds to cover the State’s share of the budget of SPDC, the joint venture E&P company and this may shore up Shell’s position in that country in the short term. But Nigeria is the exception and with oil prices at $90 a barrel most NOCs have income galore to make them largely independent of the multinational giants.

    So the model for the future is the oil-poor world continuing to grow economically but needing oil and gas imports to fund that growth – the United States the largest and most obvious example. The western oil companies will continue to exploit resources in their western homelands – increasingly non-conventional resources such as the Canadian oil sands. But their traditional role as explorers and producers in the rest of the world will swiftly decline (as it already has substantially) because the NOCs frankly don’t need their help any more. In many cases the NOCs already have as much expertise as the multinational companies that they used to rely on. Where that expertise in a particular technical area is missing then the NOC can buy it in from (for example) a Schlumberger rather than being forced into a partnership with an oil company. Existing partnerships, such as PDO, may well continue for a while but once the new generation of leaders in Oman begins to take power it is not conceivable that they will continue to tolerate a situation under which a substantial proportion of their revenue streams from oil and gas go not to their own people but to western companies – primarily Shell.

    Jeremy Leggett is one of the pessimists who argue that oil production is close to peaking and that as a result the western world’s over-dominance on hydrocarbons will imperil their economic future. However when he says that the National “…oil and gas producers are going to start keeping what remains for themselves in an effort to feed their own economies” he is being disingenuous. Whilst some of the major resource holders do indeed have large populations and large economies (North America and Russia in particular) in the main reserves are concentrated in countries with small populations relative to their hydrocarbon wealth – Saudi Arabia, Kuwait, the United Arab Emirates, Libya, and Qatar in particular (these five countries have 40% of the world’s proven oil reserves between them). In addition other major resource holders such as Iran, Iraq, Venezuela and Nigeria are likely to remain substantial net exporters for a very long time as their economies are comparatively undeveloped and not very energy intense.
    I would draw rather different conclusions than Mr Leggett from his analysis. I agree that the multinational oil companies’ days are numbered and suggest that they will have to institute further consolidations and mergers to survive at all. They are also highly vulnerable to the more sophisticated of the NOCs who might envy the multinationals’ downstream strengths and try and acquire these refining and marketing assets. There are also political attractions for (in particular) Russia to use their financial muscle to swoop on Shell or BP – what pleasure that would give Mr Putin! However the main changes in the next couple of decades are likely to be a growing strength of the OPEC producers and their diversification (using oil revenues) into other business areas around the globe. The most entrepreneurial of the oil rich states (with the UAE in the lead) are well underway with their strategy of using their financial (oil driven) strength to acquire a range of non oil assets in the west.

    There is a case to be made that the principal challenge for the west for the foreseeable future will not be how to cope with “peak oil” but how to cope with the shift in control from the old world in which the multinational oil companies played a significant part to the new world where both the control of hydrocarbon assets and, increasingly, other core businesses is in the hands of a small number of increasingly powerful new players – especially in the Middle East and North Africa. That will be a political challenge for the nest US President – perhaps his (or her) principal one.

    © Paddy Briggs February 2008